EU-wide borrowing for defense a ‘no-brainer,’ says Spain’s finance minister

BRUSSELS — The European Union must explore issuing common debt to finance increasing defense spending, Spanish Finance Minister Carlos Cuerpo told POLITICO.

His comments add fuel to the fire over the bloc’s dilemma of how to dramatically scale up its defense budget, an issue that threatens to cause deep ruptures among European governments, as the EU faces up to the new United States administration’s approach to the war in Ukraine.

Speaking on the sidelines of a gathering of eurozone finance ministers on Monday, Cuerpo said a proposal from the EU’s executive to bend the fiscal rules to allow more spending leeway is not enough to meet Europe’s defense challenges.

He argued instead that issuing common debt to finance “public goods” such as defense and electricity interconnectors is a “no-brainer.”

“There is a clear case there to give continuity to what we’ve been doing with Next Generation EU,” he said referring to the bloc’s €650 billion post-Covid recovery scheme that was financed through common borrowing.

Madrid’s calls for joint debt come as the bloc grapples with U.S. President Donald Trump’s sudden move to end the war in Ukraine — and potentially reduce the American military presence in Europe in the years to come.

In June last year, the European Commission estimated additional defense investment of around €500 billion is needed in the EU over the next decade.

Despite the urgency, the idea of joint debt is still politically toxic for more fiscally conservative states in Northern Europe.

“More common debt is not the way forward,” Dutch Finance Minister Eelco Heinen told reporters on his way into the meeting of finance ministers, known as the Eurogroup, on Monday. In his view, politically unpopular budget cuts must compensate for more defense spending “because the money is not free.”

On the other hand, countries with high debt and overstretched budgets, such as Italy and France, view common borrowing as the only way to increase defense spending without falling foul of the EU’s budget police.  

And over the weekend, Friedrich Merz, who is the front-runner to be the next German chancellor after an election on Feb. 23 according to polls, opened the door to joint borrowing.

The defense dilemma

EU countries are looking to dramatically scale up their defense investment in a way that is financially viable.

Friedrich Merz, who is the front-runner to be the next German chancellor after an election on Feb. 23 according to polls, opened the door to joint borrowing. | Pool Photo by Kay Nietfeld via Getty Images

Last week Commission President Ursula von der Leyen proposed triggering an emergency clause that would allow military spending to be exempted from the EU’s tightly controlled budget deficit limits.

Cuerpo issued a lukewarm response to this idea. He argued that stretching existing rules, which already grant preferential treatment to defense spending, would equally free up room for investment.

“The end point would be the same. And, therefore, the space would be there for those countries to actually implement those investments,” he said.

However, Cuerpo admitted that “EU fiscal rules in isolation” will do little to address the bloc’s underspending on defense.  

He suggested instead expanding the European Investment Bank’s defense-related investments, channeling more private capital and tapping into the European Stability Mechanism that was created to rescue bankrupt countries during the eurozone crisis.

With 1.28 percent of its gross domestic product going toward defense, Spain is the NATO country with the lowest ratio of military spending.

Madrid plans to hit the alliance’s 2 percent target ratio between GDP and defense spending by 2029.

“We’ve been among the countries that have increased the most in absolute terms defense spending and investment over the past few years,” Cuerpo said.